Key points to remember
- Chainlink is the best crypto decentralized oracle network known for providing price data to power DeFi applications.
- The network plans to launch a token staking and node delegation system.
- The updates could help make Chainlink more secure and decentralized, potentially sparking renewed interest in the project.
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Plans to expand Chainlink’s oracle network and bolster its security with a new token staking system could breathe new life into the project in the second half of 2022.
What is the chain link?
Chainlink is a decentralized network of nodes that provides data and information from off-chain sources to blockchain smart contracts via oracles.
When a smart contract needs to obtain external data, such as the price of Bitcoin in USD, it can request it from Chainlink’s oracle network. When a contract makes a request, eligible oracles provide responses, then a Chainlink aggregation contract takes all the data from the oracles and reconciles it for an accurate result. Oracles are then rewarded with LINK tokens for their efforts. Although Chainlink is best known for providing oracle services to decentralized financial protocols that rely on off-chain price feeds, it also provides fast and accurate off-chain data reporting for everything from the SWIFT payment system to AccuWeather.
Currently, only Chainlink oracles run by professional teams of node operators, infrastructure engineers, or companies that build infrastructure exclusively for Chainlink are allowed to provide data feeds and earn LINK. While anyone can start running a node, only those who pass Chainlink’s approval process are responsible for contributing data. Subsequently, Chainlink is not as decentralized as blockchains such as Ethereum where anyone with 32 ETH can run a full node and help validate transactions. However, it should be noted that Chainlink’s nodes are distributed in data centers around the world, which makes the network more resilient than other more centralized oracles.
By reliably connecting data from different off-chain sources to on-chain smart contracts, Chainlink has become an invaluable part of blockchain infrastructure. According to data from Defi Llama, the oracle Chainlink network secures approximately $15 billion in value across all protocols that use its data streams. In May 2022, Chainlink co-founder and CEO Sergey Nazarov estimated that Chainlink had at least 60% market share in blockchain verticals such as DeFi and gaming.
Despite its position as the leading decentralized oracle network, Chainlink has been criticized for the security of its oracle’s price feeds. In the current network setup, there is no financial incentive to prevent node operators from colluding to provide incorrect oracle responses to blockchain applications that use Chainlink’s price feeds.
Ultimately, the accuracy of Chainlink’s price feeds rests in the hands of its trusted oracles. The network can be attacked if these entities are fed a large number of fake prices from other nodes, compromised, bribed or otherwise made dishonest. Eric Wall of Arcane Assets is one of the vocal critics of Chainlink and has previously argued that its security is not “crypto-economically secure” as claimed by its developers and instead relies on a system of trust.
Although Chainlink has never been attacked, its reliance on trust and a limited number of nodes may be of concern for large stakeholders, such as those securing billions of dollars of assets locked in DeFi protocols. It may only be a matter of time before the incentive to attack Chainlink’s oracle network grows too great and malicious actors seriously attempt to compromise its data feeds to profit from the ensuing chaos. .
To bolster the security of Chainlink’s oracle network, its developers plan to implement a staking system similar to those found in Proof-of-Stake blockchains. Once staking is implemented, nodes will need to lock LINK tokens as collateral, which can be taxed or “reduced” if a node misreports data. LINK tokens removed from rogue validators will then be redistributed to honest validators.
The crypto-economic security of the network should improve once the staking system introduces a penalty for dishonest nodes. The hope is that the cost of attacking Chainlink’s price oracles will outweigh the potential profits an attack could generate. This way, the oracle network would benefit from the same game-theoretic principles that deter malicious actors from attempting to attack blockchains like Bitcoin and Ethereum.
Additionally, staking will also promote community participation in the Chainlink network beyond those who are able or qualified to run their own nodes. The staking model will allow anyone who owns LINK to delegate their tokens to a trusted node operator. In a June blog post covering the topic, Chainlink developers estimated that staking LINK tokens would produce a 5% annual return from a combination of issuances from the cash reserve and fees paid. by those who use Chainlink’s data feeds. The end goal is for cash issuance to cease once Chainlink usage increases, leaving all staking rewards to come from fees paid by Oracle users.
The staking system will also increase network security through a new reputation framework. Here, nodes that consistently provide fast and accurate responses to data requests will have their feeds prioritized over the less reliable ones. When there is an excess of fast and reliable nodes for a given request, the network will need to look at other metrics to decide which nodes will be used to generate oracle data. In this case, the amount of staked LINKs each node has for its oracle services will also determine if and how often they are chosen to provide data streams. This helps improve security by aligning node operator incentives on the Chainlink network. Nodes will need to hold a large amount of LINK to be selected to provide data streams, which should deter them from attacking the network as it would harm the value of the LINK tokens backing their node.
The combination of these two principles should also help create more reliable and secure node operators. As LINK holders who wish to delegate their tokens to a node for staking will want to avoid having some of their delegation reduced, the best and most honest validators will likely attract the most tokens from LINK stakingrs. This should create a feedback loop where fast and accurate validators are consistently selected, increasing the overall reliability and security of the network.
Chainlink aims to release a 0.1 version of its staking system later this year. At first, staking nodes will only provide a price feed for the ETH/USD pair and will launch with limited functionality. However, if version 0.1 launches without any problems, the developers will release version 1.0, adding additional features such as reduced stakes and incorporating user fees into rewards. In the future, a full 2.0 release will extend Chainlink staking to other services beyond providing price feeds and introduce loss protection. This service allows sponsors of oracle services to purchase insurance against losses of oracle networks providing inaccurate data streams.
The future of Chainlink
The launch of node staking and delegation will mark the beginning of a new chapter in the LINK token economy. For the first time, LINK will gain additional utility beyond facilitating payments for oracle services. Node operators will be incentivized to lock their LINK tokens through staking so that they can earn a greater portion of cash issuances and usage fees. Additionally, many LINK holders will likely choose to delegate their tokens to nodes to receive staking rewards.
In the longer term, LINK staking could provide a form of cash income for holders. Once Chainlink Treasury has distributed all of its reserve tokens, the circulating supply will stop inflating. At this point, the staking rewards will only depend on the fees of the protocols using the oracle network. Similar to how holding and staking Ethereum after its upcoming network merge will produce cash flow based on network usage, LINK stakers will also receive rewards based on demand for Chainlink’s oracle services. .
However, how long it will take for Chainlink to reach this point in its roadmap remains uncertain. Although he previously hinted at a late 2022 release for LINK staking, specific details on the system’s implementation, timing of token issuances, and rollout of the full 2.0 staking system remained vague. Still, if Chainlink can implement staking and move towards its 2.0 roadmap, it should enjoy a renewed wave of interest in the cryptocurrency space over the next few months.
Disclosure: At the time of writing this article, the author owned ETH, LINK, and several other cryptocurrencies.